A retention is an amount withheld by the party to a construction contract (Party A) from an amount payable to another party to the contract (Party B) as security for the performance of Party B’s obligations under the contract.
Retentions withheld under construction contracts must be held on trust unless one of the parties to the contract is a residential occupier of the premises. The primary reason for this is so that the retention funds will be set aside and available to be paid out to Party B in the event that Party A becomes insolvent before it pays the retention funds out to Party B.
However, a number of weaknesses have been identified in the current retentions regime and the Construction Contracts (Retention Money) Amendment Act 2023 has now been passed in order to improve and strengthen the regime. The amendments will apply to commercial construction contracts entered into or renewed from 5 October 2023 onwards.
Key changes
The key changes resulting from the amendments are as follows:
Trust to be automatically created
- A trust will automatically be created when a party is entitled to withhold retentions under a construction contract irrespective of whether the party intends to hold the retentions on trust and whether they are set aside or calculated or payment is made. This change is intended to ensure that the retentions funds are deemed to be held on trust even if they have not been set aside as they should have been.
Bank Accounts
- Retention funds will be required to be held in a separate bank account used solely for the purpose of holding such funds and interest on them. This is not a requirement under the current regime which allows mingling of trust funds and non-trust funds in the same account.
- If a party wishes to keep retention funds held for different parties in the same bank account then it will be required to keep separate ledgers for each parties’ retentions. This requirement should make it easier to identify the retention funds held for each party.
- The bank account holder will need to make the bank aware that the account is a trust account. This raises the possibility of banks potentially being held liable if they knowingly allow funds to be used for other purposes.
Reporting Requirements
- New reporting requirements will apply. As soon as practicably possible after an amount becomes a retention and at least every three months the party holding the funds will need to report on the amount held, bank account details and the balance to the party that it is holding the retention for.
Appointment of Receivers or Liquidators
- If the company holding the retentions is placed into receivership or liquidation, then the receiver or liquidator will automatically become the trustee of the retention fund. The current regime does not confer any specific powers on receivers and liquidators in relation to retention funds so in some cases they have needed to make an application to the court before they could administer retention funds.
- The receiver or liquidator must then collect, manage and disburse the retention money in the same manner that the party holding the retention would have been required to.
- The receiver or liquidator will be entitled to have their reasonable fees met from the retention funds and is not liable for previous breaches.
- The provisions about the roles and powers of receivers and liquidators will apply to receiverships or liquidations that commence after 5 October 2023 irrespective of when the construction contract was entered into or the retentions withheld.
Using Retention Funds to Remedy Defects
- Retention funds will still be able to be used to pay for remedying defects in the contract works provided that:
- the contract allows for this and any provisions of the contract relating to the use of the retention funds are complied with; and
- at least 10 working days before using the money for that purpose, written notice must be given of the intention to use the funds for that purpose and details of the defects to be remedied.
Enforcement
- New enforcement provisions will make failure to deposit or keep retention funds in a compliant bank account an offence for both the party liable to hold the retention and its directors. Fines of up to $200,000 / $50,000 for parties / directors will apply which should provide a strong incentive for parties to complying with these requirements.
Conclusion
Parties that wish to continue to withhold retentions under construction contracts needs to make sure that they understand the retentions reforms and prepare systems compliant with the new requirements now so that they are ready when the new system starts to come into play from 5 October 2023.
Receivers and liquidators should also ensure that they understand the powers and obligations that they will hold in relation to retention funds when the reforms begin to apply so that they are ready to comply with these.
